Wage Inflation Picks Up

Mortgage rates showed some nice improvement following Wednesday’s release of the Fed Minutes. Friday’s key Employment report caused a reversal, however, and mortgage rates ended the week with little change.

From the presidential election until the last few days of the year, the trend in yields was upward, and this kept many potential bond buyers on the sidelines. Buyers finally stepped in at the end of the year and then paused early this week. It appears that they were waiting until a major risk, the Minutes from the December 14 Fed meeting, was out of the way. When there were no surprises in the Minutes, investors felt comfortable purchasing bonds again. The rush to buy intensified on Thursday, pushing mortgage rates to the best levels in a month, but Friday’s economic data halted the rally.

The most notable aspect of Friday’s closely watched monthly Employment report was an upside surprise in wage growth in December. Average hourly earnings were 2.9% higher than a year ago, up from 2.5% last month, and the highest level since 2009. Job gains in December came in right on target. The unemployment rate increased to 4.7%, as expected

Another important economic report released earlier in the week also hinted at higher future inflation. Manufacturers reported that they expect a large increase in the prices to be paid for producing goods. Since it reduces the value of future cash flows, inflation is negative for mortgage rates. Already wary about inflation due to the manufacturing report, investors pushed mortgage rates higher after the wage data.

Looking ahead, the most significant economic report will be Retail Sales on Friday. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. Before that, the JOLTS report will come out on Tuesday. JOLTS measures job openings and labor turnover rates. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday, and there will be many Fed officials speaking during the week.